Accounting

Principles

Submitted by: Capurihan, Jhesslyn

Submitted to. Sr. Fritz

 Accounting principles are the general rules and guidelines that companies are required to
follow when reporting all accounts and financial data.

Different Accounting Principles (Basic Accounting Principles);

 Accrual principle. This is the concept that accounting transactions should be recorded in
the accounting periods when they actually occur, rather than in the periods when there are
cash flows associated with them. This is the foundation of the accrual basis of
accounting. It is important for the construction of financial statements that show what
actually happened in an accounting period, rather than being artificially delayed or
accelerated by the associated cash flows. For example, if you ignored the accrual
principle, you would record an expense only when you paid for it, which might
incorporate a lengthy delay caused by the payment terms for the associated supplier
invoice.

 Conservatism principle. This is the concept that you should record expenses and
liabilities as soon as possible, but to record revenues and assets only when you are sure
that they will occur. This introduces a conservative slant to the financial statements that
may yield lower reported profits, since revenue and asset recognition may be delayed for
some time. Conversely, this principle tends to encourage the recordation of losses earlier,
rather than later. This concept can be taken too far, where a business persistently
misstates its results to be worse than is realistically the case.

 Consistency principle. This is the concept that, once you adopt an accounting principle
or method, you should continue to use it until a demonstrably better principle or method
comes along. Not following the consistency principle means that a business could
continually jump between different accounting treatments of its transactions that makes
its long-term financial results extremely difficult to discern.

 Cost principle. This is the concept that a business should only record its assets,
liabilities, and equity investments at their original purchase costs. This principle is
becoming less valid, as a host of accounting standards are heading in the direction of
adjusting assets and liabilities to their fair values.

 Economic entity principle. This is the concept that the transactions of a business should
be kept separate from those of its owners and other businesses. This prevents
intermingling of assets and liabilities among multiple entities, which can cause
 considerable difficulties when the financial statements of a fledgling business are first
audited.

 Full disclosure principle. This is the concept that you should include in or alongside the
financial statements of a business all of the information that may impact a reader's
understanding of those statements. The accounting standards have greatly amplified upon
this concept in specifying an enormous number of informational disclosures.

 Going concern principle. This is the concept that a business will remain in operation for
the foreseeable future. This means that you would be justified in deferring the recognition
of some expenses, such as depreciation, until later periods. Otherwise, you would have to
recognize all expenses at once and not defer any of them.

 Matching principle. This is the concept that, when you record revenue, you should
record all related expenses at the same time. Thus, you charge inventory to the cost of
goods sold at the same time that you record revenue from the sale of those inventory
items. This is a cornerstone of the accrual basis of accounting. The cash basis of
accounting does not use the matching the principle.

 Materiality principle. This is the concept that you should record a transaction in the
accounting records if not doing so might have altered the decision making process of
someone reading the company's financial statements. This is quite a vague concept that is
difficult to quantify, which has led some of the more picayune controllers to record even
the smallest transactions.

 Monetary unit principle. This is the concept that a business should only record
transactions that can be stated in terms of a unit of currency. Thus, it is easy enough to
record the purchase of a fixed asset, since it was bought for a specific price, whereas the
value of the quality control system of a business is not recorded. This concept keeps a
business from engaging in an excessive level of estimation in deriving the value of its
assets and liabilities.

 Reliability principle. This is the concept that only those transactions that can be proven
should be recorded. For example, a supplier invoice is solid evidence that an expense has
been recorded. This concept is of prime interest to auditors, who are constantly in search
of the evidence supporting transactions.

 Revenue recognition principle. This is the concept that you should only recognize
revenue when the business has substantially completed the earnings process. So many
people have skirted around the fringes of this concept to commit reporting fraud that a
variety of standard-setting bodies have developed a massive amount of information about
what constitutes proper revenue recognition.
  Time period principle. This is the concept that a business should report the results of its
operations over a standard period of time. This may qualify as the most glaringly obvious
of all accounting principles, but is intended to create a standard set of comparable
periods, which is useful for trend analysis.

Conceptual Framework

A conceptual framework can be defined as a system of ideas and objectives that lead to the
creation of a consistent set of rules and standards. Specifically in accounting, the rule and
standards set the the nature, function and limits of financial accounting and financial statements.
The main reasons for developing an agreed conceptual framework are that it provides:
 a framework for setting accounting standards;
 a basis for resolving accounting disputes;
 fundamental principles which then do not have to be repeated in accounting standards.

Philippine GAAP (Generally Accepted Accounting Principles)

Generally accepted accounting principles, or GAAP, are a set of rules that encompass the details,
complexities, and legalities of business and corporateaccounting. The
Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its
comprehensive set of approved accounting methods and practices.
GAAP aims to regulate and standardise accountancy practices by providing a framework to
ensure companies and organisations are transparent and honest in their financial reporting.
Accounting principles serve as a doctrine for accountant theory and procedures, in doing
their accounting systems.
GAAP covers such things as revenue recognition, balance sheet item classification and
outstanding share measurements. If a financial statement is not prepared using GAAP, investors
should be cautious. Also, some companies may use both GAAP and non-GAAP compliant
measures when reporting financial results. GAAP regulations require that non-GAAP measures
are identified in financial statements and other public disclosures, such as press releases.
Accounting principles ensure that companies follow certain standards of recording how
economic events should be recognised, recorded, and presented. External stakeholders (for
example investors, banks, agencies etc.) rely on these principles to trust that a company is
providing accurate and relevant information in their financial statements.
These 10 general principles can help you remember the main mission and
direction of the GAAP system;

Principle of Regularity
 The accountant has adhered to GAAP rules and regulations as a standard.

Principle of Consistency
 Professionals commit to applying the same standards throughout the reporting process to
prevent errors or discrepancies. Accountants are expected to fully disclose and explain
the reasons behind any changed or updated standards.

Principle of Sincerity
 The accountant strives to provide an accurate depiction of a company’s financial
situation.

Principle of Permanence of Methods

Principle of Non-Compensation

 Both negatives and positives should be fully reported with transparency and without the
expectation of debt compensation.

Principle of Prudence
 Emphasizing fact-based financial data representation that is not clouded by speculation.

Principle of Continuity
 While valuing assets, it should be assumed the business will continue to operate.

Principle of Periodicity

 Entries should be distributed across the appropriate periods of time. For example, revenue
should be divided by its relevant periods.

Principle of Materiality / Good Faith

 Accountants must strive for full disclosure in financial reports.

Principle of Utmost Good Faith